US ethanol mandate puts squeeze on oil refiners

The cost of complying with a federal mandate to use corn
ethanol in fuel has risen sharply in the past few months,
putting a squeeze on oil refiners.

The price of each credit that refiners need under the law
topped $1.00 last Friday, up from just a few cents last
year.

"Eventually that cost is going to get passed along," said
Bill Day, a spokesman for Valero Energy, which sells
gasoline to about 5,000 filling stations in the US.

Valero and other big refiners, such as Marathon Petroleum
and Tesoro, haven't publicly estimated how the compliance costs
would affect earnings. The industry has been reporting steady
profits recently.

The new expenses "will have an impact on refinery margins," said Tom Kloza,
chief oil analyst with the Oil Price Information Service.
Refiners could attempt to pass the higher costs on to consumers
but so far that hasn't happened, he said.

The sharp rise in ethanol-credit prices reflects
broader problems with the 2007 law, which sought to drive
increased use of renewable fuels. Another piece of the mandate,
requiring industry to buy fuels made from nonedible plants, has
run into trouble because there isn't enough supply to meet
federal requirements.

The ethanol provisions require that the oil industry blend
more of the corn-derived fuel with petroleum-based gasoline
each year. The government required the use of about 13.2
billion gallons of ethanol last year. When an ethanol maker
produces a gallon, the company receives a credit representing
roughly that much ethanol.

Such credits are subsequently bought by refineries to establish
how much ethanol they have blended into fuel. If a refinery doesn't have enough
credits, it can be fined.

Until now, refiners have been able to hit their quotas
because about 10% of US gasoline is ethanol. The US consumed
about 133 billion gallons of gasoline last year, according to
the Energy Information Administration. That meant that about
13.3 billion gallons of ethanol was blended into gasoline,
just above the requirement of roughly 13.2 billion gallons.

The Environmental Protection Agency's
proposal for this year, which could be made final as soon as
next month, could force refiners and fuel importers to use more
than 14 billion gallons of ethanol.

But refiners are reluctant to blend gasoline with more than
10% ethanol largely because auto makers say most vehicles can't
handle a higher rate. That 10% figure is known as a "blend
wall," keeping more ethanol from entering the market.

If Americans don't buy more gasoline this year than last,
the blend wall creates a conflict with the government's ethanol
requirement. The oil industry is pushing the EPA to lower the
2013 ethanol requirement.

Fears that they will hit the blend wall appear to have made
refiners and fuel importers eager to buy credits on the open
market, pushing credit prices higher. On Jan. 14, the price of
a credit rose above nine cents for the first time in more than
two years, according to the Oil Price Information Service. The
price has jumped more than tenfold since.

"I'm reluctant to say that we've hit the blend wall, but
there certainly is the perception we have or that we are about
to," said Mr. Kloza, the analyst.

The Renewable Fuels Association, an ethanol-industry trade
group, said refiners could market fuel blends with 15% ethanol.
That would allow more ethanol to be sold and make more ethanol
credits available.

Lawmakers "knew that they were driving changes to the
marketplace as well, and it's those marketplace changes that
the oil companies are resisting," said Bob Dinneen, the
association's president.

Refiners say consumers don't want 15% blends, largely
because auto makers generally advise against using blends that
high, except for models such as flex-fuel vehicles and some
2013 vehicles.

Marathon spokeswoman Angelia Graves said the high prices for
ethanol credits showed that the government's mandate is
"unworkable."

The EPA said it would determine this year's ethanol mandate
after a public comment period closes in April and declined to
address criticism of the rule until then.

Stephen Brown, Tesoro's vice president for
federal-government affairs, said the situation could give US
refiners an incentive to export gasoline because exports aren't
subject to the same ethanol requirements.

Dow Jones Newswires

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Barry O has the EPA running wild and only the next election can stop it! Green cars run on electricity generated by coal fired plants, and they are going to shut down all the CFP's they can! At least here in Florida we can choose to sweat, by running less AC.

But all the North East liberals are going to freeze their butts off when the juice and oil run out!

George Kosanovich03.13.2013

How is it that auto engines in Brazil made by the same companies routinely use 20-25% ethanol in their gasoline with no deleterious effects?

Cal Hodge03.12.2013

Given the reduced gasoline demand and the President's mandate for tougher CAFE standards which will further reduce gasoline demand it is time for a techical ammendment to the RFS. As a nation we cannot risk damaging millions of cars to satisfy a mandate that was made when gasoline demand was expected to increase. Also, cellulosic ethanol technology has simply not developed. I propose the following technical corrections.1) E10 be the basic US gasoline.2) The ethanol portion of E85 be made exempt from the road tax .3) The cellulosic mandated volume be based upon the prior year's production.

Arthur Thomposon03.12.2013

Ethanol takes more energy to make than it yields making it a lose lose product. Ethanol is a terrible fuel source as it is lower in energy than gasoline which means I have to use more to do the same task with gas. My vehicle is not made to use the higher ehanol blends, who is going to absorb the cost of making it safe to use the higher blends? It sure as heck isn't in my budget.